Making distributions late in Plan Year

[rblum50]

I have a calendar year 401(k) plan that I do administration for. Each year the accountant is very slow in getting me data to do the prior year's admin. For 2015, he didn't get me the data I needed until the first week in September, 2016. I got everything completed and submitted prior to the time the extension ran out. This plan has commingled money. Therefore, the last account balances that I have are as of December 31, 2015. I just had a request for a plan distribution from a prior plan participant. Given that we are halfway through November, I feel awkward paying out a balance that's almost 10 1/2 months old. If the plan has had gains during 2016, the participant won't share in them. Alternatively, if the plan had losses, the Participant is getting more than he deserves, What is the standard practice in a situation like this.

[ETA Consulting LLC]

This is one of the drawbacks of the traditional (Balance Forward) recordkeeping system. They should weigh various alternatives (daily being one).

Good Luck

[rblum50]

Given that balance forward is what they currently have, what would you suggest?

[Belgarath]

There's really no standard answer for this - it is heavily dependent upon facts and circumstances. Most plans provide for a special valuation at such time as the Plan Administrator deems appropriate. So in extraordinary circumstances, you can do an "off-anniversary" valuation. This, however, is a very slippery slope, especially if a HC is involved.

As an example of where it might be appropriate - suppose the total plan assets are $500,000 as of 12/31/2015, with $400,000 of that belonging to the owner, who retires. By the time the distribution is made, the assets have dropped by 20%. Under the "standard" valuation practice, owner would get $400,000, and everyone else would be left with zilch. So some sort of special valuation would have to be done in such a situation.

If you do it for one person, then you have to consider whether or not you need to do it for everyone. If not, what are the objective parameters you are going to establish for when you do and when you don't?

So a tricky issue, with no answer that works for every situation.

[rblum50]

I am aware of this technique, but, this isn't the case here. The participant is a NHC staff person. The accountant is the blame for taking so long in getting me the data. Blame aside, should the participant receive the account balance from 12/31/15 or wait for the 12/31/16 account balance?

[Belgarath]

Unanswerable question for me. Totally dependent upon facts and circumstances. If the gain or loss is small, then I'd just pay them out. If gain or loss is large, then you have to consider the issues already discussed. "Small" and "large" gains are in the eye of the beholder, so I can't give you any hard number. You give it your best shot, and present the alternatives to the Plan Administrator, who will then decide. Or more likely, ask which alternative you recommend...

[Bird]

There's nothing "wrong" with paying someone out late in the year under these circumstances. I will sometimes tell explain the situation to them (the participant), and explain that if they want to take their chances and wait, they can. Most will just take the money and run but I feel better letting it be their decision.

Of course if you need the data from the accountant to determine the G/L you are having the same conversation in about a year.

[BG5150]

What does the plan document say about timing of distributions? Is it something like "as soon as administratively feasible"? If so, then I can't see a reason for waiting over a month and a half.

What if the asset value takes a nosedive between now and next year?

[GMK]

IMO, the best solution is, as ETA suggests, to get the Plan to switch to daily valuations.

Otherwise, explain to the accountant the importance of getting the information out earlier. If the accountant continues to wait until September, find an accountant who is more responsive to the needs of the Plan.

For example, years ago, we had a TPA that treated our annually-valued ESOP like a daily-valued 401(k) and thought is was OK to wait until 5500 time (July) to get us EOY account balances. To do distributions as soon as practicable after the end of the Plan Year (12/31), we need the information much sooner. We explained all that to this person, but it didn't stick. So, we got the TPA firm to assign someone else to crank the numbers for the ESOP, and we were able to do distributions timely.

Whatever works for Plan purposes is good.

[K2retire]

We used to suggest that the participant might want to take a partial distribution now (75-80%) and the rest after the first of the year. Many balance forward plans would allow an allocation of gain or loss so long as part of the balance is still in the plan.

[ESOP Guy]

What you describe was normal back when balance forward was the norm. Back then most people figured it would all equal out in the end. Some year there were gains and some years a loss so the effect pretty much was a wash over time for everyone.

The hard part was years like 2008 and the plan allowed in-service distributions. I had a balance forward plan that was annual and allowed for in-service distributions. People started figuring out that they could get their 12/31/2007 balance out in Oct of 2008. There was a run on the bank.

They were just forced to amend the plan to stop such things by making it quarterly valuation and you couldn't get paid an in-service until after the next quarterly work was done.

It is why people moved to daily once technology made it practical and affordable as others are saying.

[hr for me]

I'd be speaking with the client (unless he IS the client) and letting them know the issues he is causing. This is unacceptable! Even with balance forward, it shouldn't take 9 months to get you data/earnings that should be coming much sooner. Even when we did annual balance forward back in the day, we still got monthly trust/earnings statements and contribution/loan payments so we had an idea on transactions/balances throughout the year and could have calculated earnings midyear for a distribution if need be -- some plans did distributions quarterly even though they only did valuations annually. But then again, we also did all the trust to plan reconciliations for our clients. I don't ever remember a client where an accountant was involved honestly in any of the balance forward plans we did.

[chc93]

Unanswerable question for me. Totally dependent upon facts and circumstances. If the gain or loss is small, then I'd just pay them out. If gain or loss is large, then you have to consider the issues already discussed. "Small" and "large" gains are in the eye of the beholder, so I can't give you any hard number. You give it your best shot, and present the alternatives to the Plan Administrator, who will then decide. Or more likely, ask which alternative you recommend...

Years ago, we had a few annual balance forward plans that the plan administrator/trustee set some amount that if the distribution was more, then either wait till the next valuation, do a partial distribution, or do a special valuation. So if the distribution was more than, say 10% of total plan assets, one of the 3 options would be used... or if the distribution was less than, say 10% of total plan assets, the distribution was paid based on the last valuation. The percentage of total plan assets, and the options to be used, were decided by the plan administrator and applied consistently for the plan.

[david rigby]

If the sponsor does not want to change to daily valuation, ask if they want to change to quarterly. If so, then make sure you can get whatever information you need on that basis. Not a perfect solution, but it avoids the pitfalls of a "special valuation".

[Mike Preston]

At the cost of three additional valuations each year ad infinitum. Seriously?